McDonald's seeks bigger bite in China with strategic tie-up

August 08, 2017 19:01
McDonald's waitresses don traditional Qing dynasty imperial costumes to serve fries to diners in a restaurant in China. Photo: CNSA

McDonald's Corp. has outlined ambitious plans to grow its China business, including boosting its outlets in the country by 80 percent in five years and a renewed push into lower-tier cities.

The US-based fast-food behemoth announced on Tuesday the completion of a strategic partnership with China's state-backed CITIC, a deal that is expected to lead to a "new era of growth" in a key market.

The partnership with CITIC, together with the Chinese conglomerate's affiliate CITIC Capital Partners and private-equity firm Carlyle Group, will operate and manage McDonald's businesses in mainland China and Hong Kong.

Under “Vision 2022", the new joint venture, in which the CITIC conglomerate will have a combined stake of 52 percent, aims to add 2,000 restaurants in mainland China within the next five years to bring the total in the country to 4,500.

"China will soon become our largest market outside of the United States. We are excited to join forces with CITIC and Carlyle for better localized decision-making to meet changing customer demands in this dynamic market," Steve Easterbrook, McDonald's President and CEO, said in a statement.

McDonald's also hopes to boost its business in Hong Kong, where it currently has about 240 outlets, the highest restaurant-to-population ratio across all the company's markets.

But the main focus appears to be the Chinese mainland, where arch rival KFC has already boosted its network to some 5,300 outlets but has been struggling with tepid sales growth.

In recent years McDonald's has been forced to go on a diet, shedding ailing business in many parts of the world. 

In this situation, tapping into key growth markets has become imperative for the fast-food giant, leading to the renewed push on Chinese consumers.

"Ramping up a new era of growth and innovation, the partnership will leverage combined expertise and strength to drive an expansion strategy," McDonald's said in its statement Tuesday.

"We believe this is a winning formula that fuses McDonald's global quality standards and branding with CITIC and Carlyle’s extensive resources and market expertise in real estate, finance, supply chains, consumer & retail, and technology."

There are two types of McDonald’s restaurants in most markets: those owned and operated by the company and those franchised to third-party licensees.

The partnership has received Chinese regulatory approval and was completed on July 31, creating the largest McDonald’s franchisee outside the US.

The new venture, headed by CITIC Capital CEO Zhang Yichen, announced a series of development initiatives for mainland China, in particular “Vision 2022” that aims to drive double-digit sales growth in each of the next five years, helped by addition of 500 new restaurants per year.

It is understood that CITIC will foot much of the bill for the aggressive expansion into mostly third and fourth-tier cities and towns in China.

An innovation hub will be set up in Hong Kong and another one in Shanghai, for menu innovation and advanced digital retail experience.

Compared with KFC's exemplary localization to meet the tastes of Chinese customers with a slew of seasonal, fusion choices of local ingredients and non-fried food, McDonald's is seen as a laggard in adopting to the China market, with its menu still stocked with US style deep-fried wings and beef cutlets.

While the company's fries, chicken nuggets and apple pies have been the comfort food for numerous Americans, their Chinese counterparts are not too impressed, especially as many people remember a stale-meat scandal in 2014 that took the already dropping number of patrons into a free fall.

It remains to be seen if the new Chinese stakeholder will help the brand understand better the increasingly discerning tastes of mainland diners.

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With help from Chinese state-backed conglomerate CITIC, McDonald's will make an aggressive push into lower-tier cities on the mainland. Photo: HKEJ
A McDonald's restaurant is set in a traditional Chinese bamboo house in the southeastern Fujian province. Photo: CNSA